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REAL PURCHASING POWER: The ability to acquire wants-and-needs satisfying goods and services with income or money. The real purchasing power of income or money depends on the prices of the goods and services. If the price level, for example, doubles, then a given amount of money can purchase half as many goods and services.

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Lesson 10: Utility and Demand | Unit 1: The Set Up Page: 2 of 21

Topic: Bring On Utility <=PAGE BACK | PAGE NEXT=>

  • Some definitions:

  • Utility is the satisfaction of wants and needs obtained from the consumption or use of goods and services.
  • Utility maximization is the process of obtaining the highest possible level of utility from the consumption or use of goods and services.
  • Constrained utility maximization is the process of obtaining the highest possible level of utility from the consumption or use of goods and services, under given restrictions, when the highest overall level of utility cannot be reached.
  • One last utility concept:

  • The law of diminishing marginal utility is a principle stating that as more of a good is consumed eventually each additional unit of the good provides less additional utility; that is, marginal utility declines as the quantity consumed increases.

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AGGREGATE EXPENDITURES DETERMINANTS

Ceteris paribus factors, other than aggregate income or production, that are held constant when the aggregate expenditures line is constructed and which cause the aggregate expenditures line to shift when they change. Some of the more important aggregate expenditures determinants are interest rates, expectations, fiscal policy, wealth, and exchange rates.

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